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Oil and the American Way of Life: Don ’ t Ask, Don ’ t Tell. Robert K. Kaufmann Boston University August 4, 2011. http://www.bu.edu/cees/people/faculty/kaufmann/index.html. 10 Billion Barrrels. Basic Facts of the Oil Market 2008. World oil demand 85.5 million barrels per day

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Oil and the American Way of Life:Don’t Ask, Don’t Tell

Robert K. Kaufmann

Boston University

August 4, 2011

http://www.bu.edu/cees/people/faculty/kaufmann/index.html


10 Billion Barrrels

Basic Facts of the Oil Market 2008

World oil demand 85.5 million barrels per day

OPEC produced 44 percent of the world market

US consumed 20.6 million barrels per day

US imported 57 percent of its consumption


One Big World Oil Market?


Reducing US Dependence on Imported Oil is a “Good Thing”


The Costs of Increasing US Production

0.08

0.07

0.06

0.05

Fraction

0.04

0.03

0.02

0.01

0

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

Kaufmann, R.K. and C.J. Cleveland. 1991. Policies to increase US oil production: Likely to fail, damage the economy, and damage the environment. Annual Review of Energy and the Environment16:379-400.


A Competitive Market

Prices Oil Efficiently


Annual Change in Real Oil Prices

80

Competitive Market

OPEC

60

Texas Railroad

Commission

40

20

0

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

-20

-40

-60

Kaufmann, R.K. 1995. A model of the world oil market for Project LINK Economic Modelling 12:165-178


OPEC Control

1

0.9

0.8

0.7

0.6

0.5

Fraction

0.4

0.3

0.2

0.1

0

1938

1943

1948

1953

1958

1963

1968

1973

1978

1983

1988

1993

1998

2003


The Impact of Higher Oil Prices


We Spend More Money on Energy…

10

9

8

Percentage

7

6

5

4

1959-I

1964-I

1969-I

1974-I

1979-I

1984-I

1989-I

1994-I

1999-I

2004-I


And Less on Other Goods and Services


Household Energy Expenditures & Mortgage Delinquency


Prices: Speculation or Fundamentals?


Market Fundamentals


OPEC Capacity Utilization


The Determinants of World Oil Prices

OPEC Capacity Utilization OPEC production divided by OPEC Capacity

OECD Stocks Days of forward consumption

Refinery Utilization Percentage

Futures Market Contango vs Backwardation

Temporary Disruptions: Hurricane Season

Kaufmann et al. 2008 Oil prices: The role of refinery utilization, futures markets, and non-linearities Energy Economics 30(4):2609-2622.


Changes in Market Fundamentals?

Kaufmann et al. 2008 Oil prices: The role of refinery utilization, futures markets, and non-linearities Energy Economics 30(4):2609-2622.


US Oil Inventories


Price Discovery

WTI_Far_MonthBrent_Far_Month

WTI_Near_Month Brent_Near_Month

Dubai_Near_Month

WTI_SpotBrent_Spot

Bonny_Spot

Maya_MonthDubai_Spot

Kaufmann, RK. And B. Ullman, 2009, Oil prices, speculation, and fundamentals, interpreting causal relations among spot and futures prices, Energy Economics. 31:550-558.


The Dubai-WTI Far Month Spread


The Role of Traders


Speculative Effects?


Speculative Bubble?


Is the World Running Out of Oil?


2.5 trillion barrels

This Will Never Happen….But

180

160

140

120

Million barrels per Day

100

80

1 trillion barrels

60

40

20

0

1900

1920

1940

1960

1980

2000

2020

2040


Hubbert’s Forecast for a Global Peak

120

100

80

Million barrels per Day

60

40

20

0

1899

1919

1939

1959

1979

1999

2019

2039

2059

2079

2099


2032 2.9 trillion

2026 2 trillion

2021 1.5 trillion

2014 0.8 trillion

When Will Global Production Peak?

180

160

140

120

100

80

60

40

20

0

1900

1920

1940

1960

1980

2000

2020

2040

2060

2080

2100

Kaufmann, RK and LD. Shiers, 2008, The effect of resource uncertainty on the peak in global oil production and the production of alternatives, Ecological Economics.67:405-411.


Growth and Decline Rates

160

2023

140

120

2017

2036

100

Million Barrels per Day

2025

80

60

40

20

0

1900

1925

1950

1975

2000

2025

2050

2075

2100

Kaufmann, RK and LD. Shiers, 2008, The effect of resource uncertainty on the peak in global oil production and the production of alternatives, Ecological Economics.67:405-411.


The Need for Alternatives

50

45

0.8 trillion

40

35

30

Millions of Barrels of Oil Per Day

25

2.9 trillion

20

15

Current Production by Saudi Arabia

10

5

0

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

Years after the Peak

Kaufmann, RK and LD. Shiers, 2008, The effect of resource uncertainty on the peak in global oil production and the production of alternatives, Ecological Economics.67:405-411.


Do Gasoline Prices Rise

Faster Than They Fall?


Do Gasoline Prices Rise

Faster Than They Fall?


Rising Crude Oil & Motor Gasoline Prices

55

50

45

40

35

30

25

20

15

10

1

6

11

16

21

26

31


Falling Crude Oil & Motor Gasoline Prices

60

50

40

30

20

10

0

1

6

11

16

21

26

31


Yes…But

Gasoline price rise faster than they fall in: Texas, Michigan, Pennsylvania, Florida, Illinois, Minnesota, Ohio, Louisiana, Idaho

Effect caused by stocks and refinery utilization

As demand declines, producers slow refining and sell from stocks, which slows the price drop

As demand rises, refinery capacity limits supply response

Kaufmann, R.K and C Laskowski, 2004, Causes for an asymmetric relation between the price of crude oil and refined petroleum products, Energy Policy


Demand is Forecast to Rise

140

120

100

80

Global

60

OECD

40

20

Non-OECD

0

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030


Changes in OECD Demand

0.5

1985 - 1978

0

Industry

Transport

Refineries

Electricity

Residential

Agriculture

Non-energy

Commercial

-0.5

-1

90

Million barrels per day

80

-1.5

70

60

Million Barrels per Day

-2

50

40

-2.5

30

20

-3

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005


Squeeze Blood From a Stone?

1973

2004


Hubbert’s Prediction

10

9

8

7

6

Million Barrels per Day

5

4

3

2

1

0

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000


Hybrid Model

Million Barrels per Day

After: Kaufmann (1991)


Geological Maturity Outside OPEC

12

Lower 48 States

10

8

Million barrels per day

6

4

North Sea

2

0

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005


Will Opening ANWR Or Large Discoveries Solve US Supply Constraints?


USGS Projections For ANWR

United States Geological Survey, 1999. The oil and gas resource potential of the Arctic National Wildlife Refuge 1002 Area, Alaska, Open File Report 98-34.


The Story Behind the Headlines


Remaining Supplies of Oil

Figure From The End of Cheap Oil National Geographic 2004


Will OPEC Increase Production to Facilitate Demand?

60

55

50

45

40

Million barrels per day

35

30

25

20

15

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030


Should OPEC Increase Capacity?

3.5

70

3.0

60

2.5

50

Change in OPEC Production

2.0

40

1.5

30

Percentage

Percentage

1.0

20

0.5

10

0.0

0

Change in price

-0.5

-10

-1.0

-20

0

1

2

3

4

5

6

7

8

9

10

11

12

Source: Dees, S, P. Karadeloglou,. R.K. Kaufmann, and M. Sanchez, 2007, Modeling the world oil market: assessment of a quarterly econometric model, Energy Policy


Before and After the Peak


Being On-Time Matters!


Environmental Regulations, Demand, and US Refinery Capacity

20000

17000

14000

Thousand Barrels per Day

11000

8000

5000

1949

1954

1959

1964

1969

1974

1979

1984

1989

1994

1999

2004


Non-US Refinery Capacity & Demand

70

Refinery Capacity

60

50

Demand

40

30

20

10

0

1970

1975

1980

1985

1990

1995

2000


Bringing Energy Into the Classroom

  • Understanding energy

  • Touch measures of energy efficiency

  • A home energy audit

  • How much energy do I use directly


What is Energy?

Anything that has the ability to do work


Measuring Energy

CalorieThe heat required to raise the

temperature of one gram of water one

degree Celsius


Reading Food Labels

Ask students to bring in their favorite food


Human Body Temperature

‘Normal’ body temperature 37oC

Active Range 36oC - 38oC

Stability Range 34oC - 41oC

Critical thermal maximum 43oC

Critical thermal minimum 28oC


So Let’s Do a Simple Calculation

How much do you weigh? ________(kilograms)

What is normal room temperature? ____ (degrees Celsius)

What percentage of your body is water ______ (percentage 60M 55F)

How many calories are needed to maintain each gram of your body __?

How many calories do you need to eat ____?


Touch Measure of Energy Efficiency


Law of Conservation

Matter is neither created nor destroyed in a physical or chemical transformation


Second Law of Thermodynamics

In all energy conversion processes, energy loses its ability to do work and is degraded in quality


Energy In Equals Energy Out

Efficiency = Work out/Energy in

Energy In

Work out

Machine

Waste Energy (Heat)


Energy Flows in Light Bulbs

Efficiency = Work out/Energy in

Electricity In

Light

Light Bulb

Waste Energy (Heat)


Lightbulbs

Compact Flourescent

Halogen bulb

Incadescent bulb


Light Bulb Efficiency


What Kind of Bulb to Buy?

How much does the bulb cost?

How much does electricity cost?

How long does the bulb last?

How often is the bulb on?

What is the interest rate?


A Calculation?

dollars/megalumen-hour=( initial-dollars+watts-consumed*dollars-per-kilowatt-hour*thousand-hours-lifetime)

( average-lumens * thousand-hours-lifetime / 1000 )

60-watt incandescent bulb, 800 lumens, 1,000 hours lifetime, $1.00 initial cost:

( $1.00 + 60 * $0.10 * 1 ) / ( 800 * 1 / 1000 ) = ( $1.00 + $6.00 ) / 0.8 = $8.75 / megalumen-hour

15-watt CFL bulb, 800 lumens (680 average), 6,000 hours lifetime, $5.00 initial cost:

( $5.00 + 15 * $0.10 * 6 ) / ( 680 * 6 / 1000 ) = ( $5.00 + $9.00 ) / 4.08 = $3.43 / megalumen-hour


Home Energy Audit

  • How much energy do you use to move around?

  • How much energy do you use to heat your house ?

  • How much energy do you use to cool your house?


Energy Used to Move

Track how far you go each week by type of vehicle


Home Energy Audit

Obtain Information

- Electric Company (monthly bills)

- Gas Company (monthly bills)

- Oil Company (monthly bills)

- Weather Data (daily temperature)

- Size of home (square meters)


Weather Data

Heating Degree Days = 65oF – Outside Temperature

Cooling Degree Days = Outside Temperature – 65oF


Measuring Energy Use

Slope = Energy Use

HDD

Energy Use per Month

Heating Degree Days or Cooling Degree Days per Month


Comparisons


Oil Prices & Exchange Rates

Chicken vs Egg

1.6

155

1.5

135

1.4

115

1.3

95

Dollars per Euro

Dollars per Barrel

1.2

75

1.1

55

1

35

0.9

0.8

15

2000:01:07

2002:01:04

2004:01:02

2005:12:30

2007:12:28


The Bubble Bursts….

21.5

21

2007

20.5

20

Million Barrels per Day

19.5

19

2008

18.5

18

Jan

Feb

May

April

June

July

March

August

October

December

November

September


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